本田技研 (HMC) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to Honda's financial result audio presentation.

On February 3, 2010 Honda Motor announced its financial result for the third quarter that ended December 31, 2009.

Through this presentation, we'd like to summarize the result and highlight the Company's major business operation for the period.

We would also like to discuss the Company's new earning guidance for the fiscal year ending March 31, 2010.

We have posted presentation material on the Company's website and please click the banner of the new CLD model to download the files.

If you're all set, we'd like to start.

This morning your presentation contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Such statements are based on management's assumptions and beliefs taking into account information currently available to it.

Therefore, please be advised that Honda's actual results could materially differ from those described in these forward-looking statements as a result of numerous factors, including general economic conditions in Honda's principal markets and foreign exchange rates between the Japanese yen and the US dollar, the euro, and other major currencies, as well as factors detailed from time to time.

Now I'd like to start with the financial summary for the quarter.

Please have a look at slide three.

Regarding economic environment, starting from the US, we have seen some sign of recovery, although the pace is moderate.

In European countries, it seems to have bottomed out and we expect it to gradually recover, going forward.

Economies in China and India have already recovered.

And it is evident that other Asian countries has seen recovery themselves also.

In Japan, unemployment rates still remain high and the situation continues to be severe.

However, certain sign of improvement are visible, such as higher consumer spending.

In terms of currency for the quarter compared with the level of the third quarter last fiscal year, Japanese yen appreciate toward the US dollar JPY89 for $1, which was JPY7 higher.

Against the euro, yen was depreciated to JPY133 toward EUR1 which was down JPY7.

Concerning the operating environment for the motorcycle business, significant market expansion continued in Vietnam.

In Indonesia and Thailand, where we experienced a downturn in the first half, demand's starting to increase toward end of the year, whereas in US, we still see the motorcycle market deterioration compared to a year ago.

As to the automobile market, demand has expanded in China and India quite significant.

In auto industry demand has seen moderate recovery.

Under such circumstances, Honda achieved a higher profit with the Companywide cost-saving effort.

Profit, particularly in Japan and North America, improved significantly.

As for business, profit increase in Automobile Business was quite significant.

Motorcycle unit sales amounted to approximately 2.3m units for the quarter.

Automobile unit sales was 914,000 units, 2.8% less than that of the third quarter last year, however, increasing four consecutive quarters.

Power product unit sales was 988,000 units.

Financial result for the third quarter was reported on the slide.

Net income attributable to Honda Motor was JPY134.6b and EPS for the quarter was JPY74.19, which was increase of JPY63.03 from last year.

Revenue total JPY2,240.7b.

Operating income for the quarter JPY176.9b, which is up 72.7% from last year.

Income before income tax, JPY171b, which is up 97.1% compared to last year.

Equity in income of affiliates, JPY32.8b.

Corporate tax for the period became 37.7% for your references.

Now, I like to switch the microphone to Mr.

Ito.

He will discuss about the sales and operating income analysis for the quarter.

I would now like to discuss analysis of sales and operating profit for the quarter.

Please turn to slide 10.

Revenue decreased JPY292.5b, or 11.5% from last year, to JPY2,240.7b, due mainly to unfavorable currency translation impact and the decrease in automobile sales.

We estimate that decrease in revenue, excluding currency translation impact, amounted to JPY152.3b, 6% off from last year as is seen on the slide.

Revenue for the nine months is shown on the same slide.

Let me elaborate on each factor that affected the operating profit and income before income taxes.

Please turn to slide 12.

Operating income for the third quarter totaled JPY176.9b, as you could see at the bottom right-hand side of the slide, which was an increase of JPY74.5b compared to JPY102.4b over the same period of last fiscal year.

Income before income taxes amounted to JPY171b, as shown at the bar on the right side, which was an increase of JPY84.2b from the same period last fiscal year, as described on the top of the slide.

This figure shows how the operating profit was affected by each factor in detail and might be a little busy.

Let us go through each change factors from left to right.

If you could have a look at the first box from the left-hand side, it demonstrates how much gross profit was affected by the change in top line growth.

Decline of revenue, decreased unit sales of motorcycles, automobiles and power product provided a negative impact of JPY57.5 this quarter, although the favorable model mix provided a positive impact.

The second box from left shows cost reduction that also contribute to gross profit change.

Cost reduction positively impacted this quarter by JPY38.7b.

The third box from left-hand side demonstrate SG&A impact within gross profit.

Decreased SG&A expenses provided positive impact of JPY91.8b this quarter.

Honda has achieved significant reduction of expenses in advertising, sales promotion and logistics expenses.

Decreased R&D expenses provided positive impact within gross profit also of JPY37b.

The currency had a negative impact of JPY35.6b.

These are change factors on the operating income of the third quarter in comparison to third quarter last fiscal year.

From here, let me elaborate on pretax profit changes compared to the third quarter last fiscal year.

There was a valuation gain from derivative instrument agreement.

It was positive impact of JPY4.5b for the quarter.

Other non-operating income and expenses net was a positive JPY5.1b.

Out of JPY5.1b, negative JPY21.7b was caused as we hedge currencies with currency forward contracts in order to avoid currency fluctuations.

Other positive JPY26.8b was due mainly to gain on the loss from valuation of the current amount of debt and receivable in foreign currency.

Overall, currency impact at operating income and pretax profit line for the year-on-year basis was negative JPY57.3b, which consists of negative JPY35.6b in operating profit and negative JPY21.7b in non-operating profit.

Detailed information on currency impact and revaluation of derivative instruments are available on slide 40 and slide 41.

For the changes in operating profit and income before income taxes for the nine months ended December 31, 2009 please have a look at slide 13.

Now, we would like to elaborate on Honda's business performance on each business segment for the third quarter ended on December 31, 2009.

Let me describe Honda's business performance for the fiscal third quarter that ended on December 31, 2009 by each business.

Starting from the Motorcycle business, please have a look at the slide 15.

Unit sales for the quarter totaled 2.378m units, decreased by 5% compared to the third quarter last fiscal year.

This decrease was mainly due to weak sales in the other regions, particularly in Brazil.

Demand in North America, Europe and Japan remained weak for the quarter.

However, demand in South East Asian countries showed strong growth.

In Thailand, sales of fuel-injection models, such as Wave 110i and Scoopy-i, were favorable.

In India, we have enjoyed strong sales of Activa, Shine and Unicom models.

Please turn to the slide 16 for the revenue and operating income of Honda's motorcycle business.

Revenue for the quarter amounted to JPY273.4b, which was a decrease of 20.2% from the corresponding period last year.

This decrease in revenue was mainly due to a decline of unit sales and unfavorable currency translation effect.

Operating income for the quarter decreased 37.2% to JPY15.9b (sic - see Presentation).

Decreased revenue was the main factor that more than offset favorable impact from decreased SG&A and R&D expenses.

Operating margin was 5.8%.

Moving on to Automobile business, please have a look at the slide 17.

Unit sales for the quarter amounted to 914,000 units, 2.8% decrease from the third quarter last year.

Unit sales in Asia was favorable thanks to strong demand for City and Jazz compact models.

Particularly in India, where we had to suffer from sales drop due to the economic downturn in the beginning of this year, our sales have more than recovered, year-over-year basis, in the second half of 2009, driven by City model.

Sales kept strong in Thailand and, on calendar year basis, was slightly above from the year 2008 unit sales level.

We have enjoyed favorable sales in Japan also, partially thanks to government subsidies and tax break for eco vehicle purchases.

However, sales in North America, Europe and the Middle East still remained weak.

In China, market growth continued and our sales was not an exception.

Sales of City model, which was under 1.6 liter, has more than tripled, year-over-year, for the quarter.

Likewise, sales of CR-V and Civic from Dongfeng Honda has been very strong, although growth rate is not as much as that of the City model.

On slide 18 shows revenue and operating income of Honda's Automobile business.

Revenue for the quarter totaled JPY1,749.5b, decreased by 11.4% compared to the same period last year, mainly due to decreased unit sales and negative currency translation effect.

Operating income for the quarter increased by 56.5% from the third quarter last year to JPY110.4b.

Decreased SG&A and R&D expenses and continuous cost reduction effort largely attributed to this increase in operating income and more than offset decreased revenue and unfavorable currency effect caused by the appreciated Japanese yen.

Operating margin for the quarter was 6.3%.

Let us move on to Honda's business performance in Power Product business on slide 19.

Unit sales of Power Products total 988,000 units, which was a decrease of 11.4% compared to the third quarter last year.

Sales decline of general-purpose engines in North America and Europe was quite significant and mainly impacted this increase in sales, although sales of snowblowers and lawnmowers was favorable.

In Japan, unit sales of general-purpose engines for OEM use also decreased significantly as demand for exports of OEM use pumps and generators for Middle East, Asia and Africa has not recovered since the financial crisis.

Sales of pumps and general-purpose engines in Thailand and India were strong.

Speaking of revenue and operating income of the Power Product and other businesses, please have a look at the slide 20.

Revenue for the quarter was JPY73.8b, down 7.1% from the same period last year.

This was mainly due to decreased unit sales.

Operating loss was minus JPY2.9b, a decline of JPY100m from the third quarter last fiscal year.

Decreased revenue more than offset the positive impact such as decreased SG&A expenses.

Operating margin for the quarter was minus 4%.

Mr.

Takeuchi and Mr.

Oshima will be speaking about Honda's business performance of the Financial Services Business next.

Thank you.

Thank you, Ms.

[Hitori].

Regarding Financial Services business, please see slide 21.

Revenue for the Financial Services business increased by 5.5% to JPY154b due mainly to the increased sales of operating lease.

Operating profit also increased to JPY53.6b.

Decreasing provision for both credit loss and residual loss of operating lease cars, were a major driver for this increase.

Decreasing funding cost and gain on sales of lease vehicles were also contributed factor to this increase.

Operating margin for the Financial Service business raised to 34.8% for the quarter.

Now, I like to invite Mr.

Takeuchi, our General Manager of the Honda Japan Finance Division, who would elaborate detail of our Financial Service business's operation during this quarter.

Yes, reviewing sales of our Financial Service business in North America.

We experienced better than expected result for three consecutive quarters thanks to consistent healthy operation based on Honda and Acura sales, together with decreased provision of credit losses and additional losses for these cars.

As we discussed last week -- last time, when gas price went up in 2008 we saw a shift away from the larger cars in favor of smaller cars.

And it causes deterioration of the pricing of larger cars such as SUV and minivans especially.

It gave significant negative impact on used car pricing of those models.

Given that situation, we increased provision of residual losses for these cars in third quarter last year.

In 2009, as gas price becomes stable, the pricing of the used cars, such as SUV minivan, has been recovered.

Thus, the provision of the residual losses of lease car become shrunk in this quarter.

Top of that, another good sign is credit losses on 12 months rolling base has been declined compared with last year.

We estimate that provision for credit losses and residual losses for this quarter amounted about JPY30b, lower than same period last year.

Moreover, as financial market is recovering, spread of the debt and corporate bond while narrowed does help the Company's funding cost decrease.

This change in business condition has had a positive effect on America Honda Finance, a fully-owned subsidiaries.

I would like to elaborate on Honda's business results for the three months by each region now.

Starting from Japan, please turn to slide 23.

In Japan, revenue for the quarter amounted to JPY870.5b, a decrease of 19.3% from the corresponding period last fiscal year.

Decrease in export sales was the main factor for this decrease in revenue.

Operating income for the quarter totaled JPY10b, an increase of JPY74.3b.

This increase was mainly due to decrease in SG&A expenses and R&D expenses and continuing cost-reduction efforts.

Operating margin for the quarter was 1.2%.

Honda's unit sales in Japan for the quarter was quite favorable, supported partially by the government's programs.

Both scrappage incentives and tax reduction for purchases of environmentally-friendly vehicles raised the overall demand.

Given that situation, along with our hybrid vehicle Insight, sales of compact vehicles such as Fit and Freed showed significant increase from the same period last year.

Honda schedules to launch all new CR-Z sport hybrid vehicle in Japan in February 2010 and Fit hybrid model to be introduced some time in 2010.

Honda will further strengthen fuel efficient and attractive hybrid model lineup.

Moving on to North America, please turn to slide 24.

Revenue for the quarter amounted to JPY1,028.9b.

This was a decrease of 16.5% from last year, mainly due to decreased revenue in Automobile business and negative currency translation effect.

Operating income for the quarter increased by 58.1% from the corresponding period last fiscal year to JPY110.7b.

This increase was mainly due to decreased SG&A expenses that include decline of allowance for losses on credit and lease residual values, together with this funding cost in our Financial Services business.

Continuous overall Company's cost-reduction efforts also contributed to this increase in operating income despite unfavorable ForEx effect.

Operating margin for the quarter was 10.8%.

Now, I would like to discuss more about US market situation during the quarter.

During the October/December quarter some industry analysts had feared a large [payback] from the Cash for Clunkers program, which had a huge boost to August industry sales.

But it turns out that only a minor paybacks were felt in September.

During October to December period, US market showed firm underlying demand for autos with the annualized pace of about 11m units.

Regarding American Honda sales during the quarter, with the backdrop of market getting even more competitive after many new model introductions or new model changes from competitors, especially in the passenger car segment, Honda showed a stable performance of the existing models.

The sales of light truck models exceeded our expectation thanks to the popular models such as CR-V and MDX.

And Honda sales during the quarter has well exceeded last year's sales without relying on the fleet car sales, unlike other competitors.

Looking now to calendar year 2010, we start with the assumption of US industry demand to be in the lower end of 11m units with the upside potential depending on the macroeconomic situation, fleet sales activities of competitors and aggressiveness of the marketing campaigns of the competitors.

As for Honda's sales projection for this calendar year, we have many new model refreshment that will contribute to our continued stable growth.

Two of the unique light truck models were launched toward the end of last year, namely Honda Accord Crosstour and Acura ZDX.

We just had a world premier of compact hybrid sport model, Honda CR-Z, at Detroit Auto Show.

This car will open up the new segment of smart sport.

And we will new Honda Odyssey at the Chicago Auto Show.

Odyssey is an important volume model and we are confident that it will continue to be the benchmark of the family minivan segment.

And we already announced that Acura will have another new model this year.

TSX Wagon will be added to the growing Acura model lineup.

On the production side, our North American factory produced about 84% of the total units sold in the United States last year.

This high local production ratio enabled Honda to mitigate the negative impact of the yen appreciation on Honda's consolidated earnings.

Not only in North America but also in global terms, Honda will continue this highly localized operation.

With the unit sales expected to further grow this year, our East Liberty plant in Ohio, where we produce models such as CR-V and Accord Crosstour, is now back to full capacity.

The other factories in North America, such as Marysville in Ohio, and Canada factories still operate below full capacity level but the cost-reduction measures should mitigate the impact of under-utilization in each factory.

Regarding Europe, please have a look at the slide 25 of the presentation.

Revenue for the quarter totaled JPY182.2b, a decrease of 39.1% from last fiscal year.

This was mainly due to decreased revenue in all business segments and unfavorable currency translation effect.

Honda reported an operating loss of JPY6.8b for the quarter, which was a decline of JPY7.9b from the corresponding period last fiscal year.

Although SG&A expenses were decreased, it was not enough to compensate decrease in revenue for the quarter.

Operating margin for the quarter was minus 3.8%.

Unit sales plummeted in Germany with expiry of government's scrappage incentive scheme.

In other Western European countries, such as UK, France and Italy, favorable sales, due to the similar scheme, continued for the quarter and Honda's unit sales increased, year-over-year basis.

Sales of [Insight] has been favorable while sales of Civic and CR-V have suffered due to tougher competition.

The sales environment in Russia in December showed slight improvement with smaller decline compared to full year drop.

However, demand for Honda continued to stay weak.

Let us move on to Asia on slide 26.

Revenue for the quarter amounted to JPY397.1b, an increase of 3.1% from last year.

This increase was mainly due to strong sales for Automobile business which was enough to compensate unfavorable currency translation impact.

Operating income for the quarter increased also to JPY35b, up 40.1% from the corresponding period last year.

Revenue increase, a decrease in SG&A expenses and continuous cost-reduction efforts mainly attributed to this increase, despite unfavorable ForEx effect.

Operating margin for the quarter was 8.8%.

Although it was negatively affected to a certain extent by the global financial crisis in the former half of the fiscal year, recovery in both Asian Motorcycle and Automobile market has recently been quite visible.

In Honda's Motorcycle business during the quarter, on a year-over-year basis, unit sales is higher than last year's level in major countries such as India, Vietnam, Thailand and the Philippines.

In Automobile business also, Fit motor sales has been very favorable in countries such as Taiwan and India, driven by Government's tax break schemes.

Sales of City model in India and Malaysia also showed significant increase compared to the third quarter last year.

In Brazil, we have three months lag when consolidating the quarter period.

Motorcycle purchasing environment was still challenging due to still lack of credit availability, and fundamental market recovery was yet to be seen.

Honda has introduced C-150 [Fun] which was very well accepted in the market.

However, under such business circumstances, Honda's overall unit sales decreased.

On the contrary, Honda's Automobile business showed signs of gradual recovery with industrialized products tax-cut plan extended up to March 2010.

Automobile unit sales decline in Middle East and Oceania continued.

That is all for the elaboration on Honda's business performance for the fiscal third quarter ended December 31, 2009.

Thank you.

Now, on other regions that include South America, the Middle East, Africa and Oceania, please turn to the slide 27.

Revenue for the quarter amounted to JPY241b, a decline of 20.9% compared to the last year, primarily due to unfavorable currency translation effect and decreased revenue in both Motorcycle and Automobile businesses.

Operating income decreased also by 58.4% to JPY17.4b from the corresponding quarter last year.

This drop in operating income was mainly due to unfavorable ForEx effects caused by the appreciated Japanese yen and decreased revenue.

Operating margin for the quarter was 7.2%.

Yes, please see the page 34 regarding the by unit sales guidance.

We expect demand for the Motorcycle in other region centers in Brazil will be slightly decreased from the October guidance.

However, we expect sales in Asia (inaudible) consolidated subsidiary and joint venture company will stay strong.

Total Automobile sales will be kept unchanged from the previous guidance and we forecast that sales in Asia to increase yet.

Sales in Japan and North America were trimmed reflecting to changes of the current business environment.

Sales of Power Product will be 4.550m unit, an increase of 95,000 units from the previous guidance.

In term of variance of the year-on-year operating profit, please see the slide 36.

Gross profit will be decreased by JPY213.7b from last year, with a decrease in sales volume, unfavorable model mix.

However, it could partially offset with gain of JPY41b of cost reductions.

The Company's further streamlining operation together with trimming SG&A and R&D expense will make favorable contribution of JPY385b and JPY98.1b, respectively to operating profit.

That will be enough to absorb downward pressure of the unfavorable ForEx impact of JPY180b.

With regard to major drivers that's changed the Company's October earnings guideline, please see the slide 37.

Increase in [revenue] of the mix changes that is mainly attributable to our Financial Service business will provide an increase of JPY28b.

Honda will accelerate its cost-reduction effort as well as saving SG&A and R&D expenses.

That will generate a favorable JPY24b, JPY14b and JPY35, respectively, thus making an increase of JPY130b in operating profit from the Company's previous guidance.

As for CapEx and depreciation and R&D, please see the slide 38.

CapEx for the year will be JPY370b, down JPY10b from the previous year.

Depreciation will be JPY380b.

In term of third quarter's cash dividend, please see the slide 7.

Board of Directors declared a third quarter's cash dividend of JPY10, up JPY2 from the Company's previous plan.

And the Company also declared to propose cash dividend of the JPY10 for year ending dividend, totaling JPY36 for the year.

Thank you, Mr.

Takeuchi.

This conclude Honda's fiscal third quarter earning result audio presentation.

Thank you, again, for listening to our web programs.

This is Oshima of Honda Investor Relation, and have a wonderful day.

Speaker statements on this transcript were interpreted on the conference call by an Interpreter present on the live call.

The Interpreter was provided by the Company sponsoring this event.